The Hindu Business Line : Invest to fund your child’s education

Parents, invariably, want quality education for their children. But the most worrisome factor to contend with is the cost of providing this quality. Education costs have skyrocketed in the past decade. To study engineering, for instance, in a good college, it might cost anywhere in the Rs 7-10 lakh range for a four-year period. Putting your ward through medical studies, especially through a management quota, will require you to shell out at least Rs 50 lakh!

If you want to send your child abroad to do a master’s degree in engineering, the cost, including the stay, will work out to Rs 20-30 lakh, depending on the institution.

Such being the case, what should a parent do when faced with the ‘task’ of funding a child’s education? Is it mandatory to borrow money from a bank or other sources? Not necessarily, if you construct a portfolio early on in your working life through periodic investments. For, higher education, which costs Rs 10 lakh presently, will, in fifteen years, go up to Rs 24 lakh, assuming an inflation rate of 6 per cent per annum.

If you want to generate a compounded annualised return of 10 per cent for the next 15 years, you need to save a monthly a sum of Rs 5,830 to achieve the above goal. But if you look to achieve a 12 per cent return, the monthly saving will drop to Rs 4,550.

Building A PORTFOLIO

If one wishes to beat inflation and accumulate for a financial goal, it is mandatory to build a portfolio with a strong equity component based on one’s risk appetite. If your saving horizon is longer, investments in equity are likely to generate superior returns.

For investors with average risk-appetite, a viable combination, in terms of percentage, would be: 50(equity); 20 (debt); 20 (real-estate); and 10 (gold). While constructing a portfolio towards your child’s education, it not necessary that you choose only from the specially marketed ‘childrens plans’ offered by mutual funds or insurance companies. You can tailor your own portfolio based on your risk appetite. One interesting fact is that even mutual funds themselves have not floated any children plan in the last five years.

In existing children’s schemes, fund houses invest 60 per cent of the assets in debt and rest in equity based on market conditions. Children’s Plans over three and five year periods have managed an annualised return of 7-12 per cent on an average. Whereas the category average for diversified equity funds is 10 and 23 per cent respectively, while even pure debt schemes returned 6.3 and 11 per cent. Therefore, an investor can do better by choosing a mix of equity and debt schemes to build his own portfolio. For the equity portion, diversified funds with a good five year record such as HDFC Top 200 Fund, HDFC Equity, DSP Blackrock Equity and Birla Midcap appear to be good options.

However, do adhere to the practice of booking your profits at desired level, based on a target return. You may miss on part of a stock market rally by doing this, but you can be sure of achieving your targets well ahead of time. Having said that, you should not ignore the tax implications of both short and long-term capital gains before booking your profits (in the new tax code, long-term capital gains on equity will also be taxed). Debt: Debt investments can be spread between fixed deposits, income funds, and non-convertible debentures. To start with, a weight of 20 per cent of your total assets towards debt may be ideal. but as you reach closer to your financial goal(s) the weight can be increased to protect your accumulated corpus. The return through debt instruments should be at least 8 per cent post tax.

Several hybrid debt schemes generate double-digit returns over a five-year period. Since the returns on debt schemes are taxable, the yield is lower.

Under the debt oriented funds, UTI Mahila Fund is a good option as it is very consistent and over a three- and five year period it has generated compounded annualised return of 12.5 per cent and 25 per cent despite investing 80-90 per cent of the assets in debt instruments. For a male child you can open the account in your wife’s name.

Gold: Around 5-10 per cent of the assets can be invested in gold through ETFs. The ten-year annualised return of gold is 15 per cent but even a moderate return of 8 per cent will help you reach your target.

So saving for children’s education is not just a matter of starting to save and waiting for your investments to mature. You need to spend some time to monitor the growth of your money and switch to safer options, to meet your goals.

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